Despite all the headlines reminding us that September is historically the worst month for the stock markets, most were positive around the world. The Canadian government announced more changes that will affect insured mortgages and all future property sales under the principal residence exemption will have to be reported to CRA.
September 2016 Market Performance
All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.
*Absolute change in yield, not the return from holding the security.
There were many headlines this month about how September has historically been the worst month of the year for the stock markets. In Canada at least, the stock market indexes were positive. The S&P/TSX Composite Index was up 1.22% for the month, and the small cap indexes were up more than that. Most other markets around the world were flat or up a little for the month. The laggards were the S&P500 at -0.12%, the German DAX at -0.77%, and the Nikkei in Japan at -2.59%.
The bond markets were also up slightly. The broad FTSE TMX Universe Bond Index was up +0.25%. The government bond indexes ranged from +0.1% to +0.3%, while corporate bonds fared a little better: +0.2% to +0.6%. US bonds were mixed, the higher quality bonds in the Merrill Lynch AAA and BBB Corporate Bond Indexes were down for the month, while the lower quality CCC and High Yield indexes were positive. Emerging market bonds were also up marginally in September at +0.4%.
Oil was up again in September (+7.9%) after OPEC reportedly reach an agreement to limit oil production. Gold was up marginally at +0.4%. The broad Bloomberg Commodity Index was up +3.1% for the month.
The Canadian dollar was flat for the month at 1.3117 and lost -0.7% against the Euro.
Commentary- More Housing Market Changes
After the B.C. Government announced a 15% property transfer tax on foreign buyers in greater Vancouver in July, the real estate market here slowed noticeably. Today (October 3) the Government of Canada announced their own changes to various mortgage and income tax rules and regulations.
When as a Canadian resident you sell a property that you live in (your principal residence) you are generally not required to report the sale (and any gain) on your income tax return the way you would if you sold other investments like stocks. Some foreign buyers were taking advantage of this rule by claiming they or their children were living in the property to avoid paying income tax on the gains. Today the Minister of Finance has proposed that all residential property transactions where the principal residence exemption is being claimed will be required to be reported to CRA on 2016 income tax returns. This would be effective as of October 2, 2016.
Mortgage Insurance Changes
If you are not someone who is putting down less than 20% on a home purchase, the following does not apply to you. But if you’re like many people in greater Vancouver and Toronto, the following change will likely affect you.
Effective October 17, 2016 all homebuyers that are required to have mortgage insurance (those with a downpayment of less than 20%, or “high-ratio” mortgages) will have to qualify for the mortgage based on an interest rate that is the greater of their contract rate or the Bank of Canada’s conventional 5 year fixed posted rate. This already applies for high ratio variable rate mortgages and fixed rate mortgages of less than 5 years.
Since 5 year fixed mortgages are the most popular mortgage product in Canada, this will likely affect millions of Canadians. For reference, the posted Bank of Canada 5 year fixed mortgage rate was 4.64% on September 28. The best rates from brokers on that type of mortgage are roughly half of that, or less. According to RateHub a family earning $100,000 per year with $40,000 for a downpayment would have qualified to buy a home of $665,000 before the changes (assuming a mortgage rate of 2.17%, and monthly property taxes of $400 and heating costs of $150). After the rule change comes into effect, that family would be qualified to buy a home worth $506,000, a difference of $159,000.
So if you were stretching to buy that home at $665,000, its price would have to decline 24% before you would be able to afford it. Prices will likely come down in many cities with the change, but for prices to drop that much very quickly is unlikely. So you would either need to keep building your downpayment for longer, or scale back your budget. These rules will only apply to new mortgages, mortgage renewals will be exempt.
The Minister has also launched a public consultation process on lender risk sharing. When you buy a home with less than 20% down and obtain mortgage insurance, that insurance covers 100% of your mortgage. With the public consultation process, the government is likely seeking feedback on whether the 100% coverage should continue in its entirety or only be available for the most highly qualified borrowers. If the mortgage insurance no longer covers 100% of the mortgage value, the mortgage lender is effectively taking on some of that risk, and will want to be paid for taking that risk, leading to higher mortgage rates and lower home prices.
September Economic Indicator Recap
Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.
Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.
A Closer Look at the Canadian Economy
Canada’s unemployment rate rose slightly in August to 7.0% despite 26,200 jobs being added; 52,200 full time jobs were added while 26,000 part time jobs were lost. The unemployment rate rose as the labour force participation rate rose, indicating that more people were looking for work.
Housing prices across Canada rose 1.5% in August according to Teranet. Toronto (+2.8%), Victoria (+2.2%), Hamilton (+2.0%), and Vancouver (+1.7%) all posted monthly gains that were above the national average. Quebec City was again the laggard at -1.9%.
The number of new housing starts slipped to 182,700, a decline of -6.2% from July. Building permit activity in July rose +0.8%.
Inflation was negative for the second month in a row at -0.2% for August. On an annual basis, the inflation rate was +1.1%, the lowest level in almost a year, and remains under the Bank of Canada’s target rate of 2.0%. Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +1.8% for the last year, the lowest reading in almost 2 years. Retail sales were down -0.1% in July, but were up +2.3% for the past year.
GDP was up 0.5% month over month in July, or +1.3% compared to July 2015. While all economic sectors posted gains in July, most of the growth was attributed to the mining and oil & gas sectors.
While economic growth has been recovering from the slump in the first quarter of 2016, growth has not been strong enough to prompt the Bank of Canada to raise interest rates. With inflation actually slowing, the economists at TD Bank are expecting the Bank of Canada to leave its benchmark interest rate unchanged through the end of 2018. The BoC next meets on October 19.